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Berkshire Hathaway 2018 Annual Shareholder Letter [pdf]
- ac29 8y agoThey own exactly (2^16-1)*1000 shares of Delta. I wonder if that's a coincidence.
- gist 8y agoWhat you need to know about Berkshire (going forward) is that Buffet just said that there is no more low hanging fruit for him to pick as a result of private equity getting more into the game and throwing around money. It's in the letter but also detailed here: https://www.reuters.com/article/us-berkshire-buffett-m-a/warren-buffett-says-prospects-poor-for-elephant-sized-acquisition-idUSKCN1QC0HR https://www.reuters.com/article/us-berkshire-buffett-m-a/war... So just like the small VC when the game was small and before (as the saying goes) everybody and their uncle got in they did well. Now it's a much different story. And importantly the halo of Buffet will not win out over a much bigger offer from someone else. It maybe have in the past but the game has changed. Now add to that that it's obvious that Buffet will not be a star or around for another X years and we have a recipe for Berkshire not being a long term bet. So once again two things going on here. a) Warren won't be around for long enough for the tide to turn back (if it does at all). Many of the deals that got done are because of his star power (similar to Steve Jobs at Apple closing an important arrangement by force of will and halo) b) Others in the game. Competition that far exceeds what it was in the past.
- knn 8y agoWhat you're saying is not exactly true. It's not necessarily competition from PE firms, it's high market value of good businesses. From the letter: "In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects." What you're saying about competition is more true in a low growth regime (Europe pre-industrial revolution) in that too much capital kills return on capital. However growth rates are high, and will continue to be high for the foreseeable future, and return on capital in general will still be really good. Theory aside, the thesis of Berkshire is making good investments at a low price, and running businesses - of which Buffet's 'star power' is a more marginal factor in my opinion.
- gist 8y ago> it's high market value of good businesses High market value is based on what companies (or with goods people) are willing to pay. If there is more money floating around and there are more buyers then the price you pay will increase. And I am not talking about economics taught in school either. I am talking common sense the way anyone can observe even if they never took a course or read a book.
- deleted 8y ago[deleted]
- anonu 8y agoAnother great Berkshire annual letter. This one feels a bit more "subdued" than previous years. Though I love the part that Buffet's heart races at the thought of making a large acquisition. It's funny that the company is so big that there simply are not enough businesses to keep it satiated. If that goes on long enough... There will be a time when it's more valuable to break up the conglomerate.
- trident5000 8y agoStocks do beat gold over long stretches of time except in times of crisis (obviously). There are 10 year ranges where gold does beat the market. Then it goes to sleep or down for 10 years at a time (obviously this destroys its compounding effect and puts it at a severe disadvantage to stocks)....this makes sense because its a commodity... For instance it absolutely ripped in 2000 through 2011 but fell thereafter while the global economy was full steam ahead. Further, theres a reason why Ray Dalio is saying its a good time to hold some gold today. namely the absurd US entitlement schedule/unfunded pensions and global debt being absurdly high(320% of GDP). Despite what Buffet is saying, regular deleveragings (say every 10 years or so) do clearly happen as seen in 2001 and 2008 (though 2008 wasnt really a deleveraging of debt like it was in 2001 if you look at the data) - obviously it was a greater shock however... We are arguably in the "long term debt cycle/a super cycle" as Dalio writes in his latest book (which happens about every 70 years) because global interest rates are at rock bottom (central govts around the world dont have tools to bail out the economy at these levels). I know Buffet is right in the very long run, but I dont have the stomach endure the next 3 years or or so/be down like 50% for a period of time. Ill invest back in the market after this next recession.
- latchkey 8y agoI took the mention of gold as a thinly veiled statement against holding cryptocurrency. What do you think from that context? https://finance.yahoo.com/news/warren-buffett-buying-bitcoin-not-investing-110702015.html https://finance.yahoo.com/news/warren-buffett-buying-bitcoin... “There’s two kinds of items that people buy and think they’re investing,” he says. “One really is investing and the other isn’t.” Bitcoin, he says, isn’t. “If you buy something like a farm, an apartment house, or an interest in a business… You can do that on a private basis… And it’s a perfectly satisfactory investment. You look at the investment itself to deliver the return to you. Now, if you buy something like bitcoin or some cryptocurrency, you don’t really have anything that has produced anything. You’re just hoping the next guy pays more.” When you buy cryptocurrency, Buffett continues, “You aren’t investing when you do that. You’re speculating. There’s nothing wrong with it. If you wanna gamble somebody else will come along and pay more money tomorrow, that’s one kind of game. That is not investing.”
- mrfusion 8y agoHey can you guys answer a question for me. Is berkshire double taxed on the income it’s companies make? Say Berkshire owns a company. Does that company pay corporate income tax on the money it makes. Then it passes the rest of the profit to Berkshire and does Berkshire pay income tax again on that money?
- gcb0 8y agoyes and no. yes because that's capital gains, but they offset investment as capital losses on the other side and can effectively win and invest money for free
- mrfusion 8y agoWhat about dividends? Say a child company earns some money. First it pays corporate tax on it. The. It issues a dividend to brk. Then brk pays a dividend tax? Then they pay a corporate tax on the remaining money?
- wataruspeedo 8y agoIs Berkshire starting to decline because they bought Apple? Seems out of character.
- Areading314 8y agoBased on the statement, it looks like they are up over 10% on their massive investment in apple.
- tim333 8y agoThere's a two hour interview with Buffett talking about the letter etc to CNBC https://www.cnbc.com/video/2019/02/25/warren-buffett-cnbc-full-interview-berkshire-hathaway.html https://www.cnbc.com/video/2019/02/25/warren-buffett-cnbc-fu...
- tim333 8y agoThere's always something reassuring about Buffett's letters - don't worry about the market fluctuations and make worthwhile stuff I guess.
- ethbro 8y agoPart of Buffett's genius is in selecting the game(s) he chooses to play. His discipline not to be distracted by things outside his investing thesis seems critical. Other opportunities? Maybe they're better, maybe not. But better to optimize for simplicity and reliability, powered by cash flow.
- lazyjones 8y agoSo, what happens when he is no longer the one making these decisions? Will BH still outperform the S&P 500?
- honopu 8y agoHis son is going to take over. Howie I believe, yes the one that spent some time digging basements for a living - source "the snowball"
- ethbro 8y agoThat is the question. I'm not a Berkshire-head, but from what I know Buffett seems to run a pretty decentralized shop and take succession planning seriously. He mentions how accolades belong to talented BH managers rather than himself in almost every letter.
- melling 8y agoHe’s not the only one who knows the secret: https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors https://www8.gsb.columbia.edu/articles/columbia-business/sup... He’s made his ideas known for half a century.
- nabla9 8y agoThe real genius to Berkshire success is how Buffet has structured his business. Their success is not just a sequence of good investments. They make sound investments but sometimes they fail and they may cling to them too long (IBM, textiles). Heinz may turn out to be bad investment when it seems that consumer tastes are changing. I'm not sure about Wells Fargo either. Berkshire insurance and reinsurance business is producing of steady flow of cash and float they need to invest. It's the cheap money they have available at all times that is the secret sauce. The result is profitable investment opportunities without the middlemen. TL;DR: Other companies go to Goldman Sachs to finance their investments. Goldman Sachs goes to Berkshire Hathaway to fiance their business.
- no_gravity 8y agoOn the first page is a nice table with the yearly performance data of Berkshire versus the S&P 500. I wanted to see it as a graph. So I cleaned it up in VIM and then made this chart from it: https://www.productchart.com/blog/2019-02-23-berkshire https://www.productchart.com/blog/2019-02-23-berkshire
- verelo 8y agoI feel like this doesn’t lend itself well to that graph style, hard to interpret. Maybe some log scale needs to be applied to the y axis first to point out the differences.
- statguy 8y agoOne way to show the difference would be to sort one of the graphs - though it would mix up the years.
- no_gravity 8y agoAgree that it is not easy to interpret. I could add a log scale chart, but since the value is the annual percentage change of market value, I think a linear scale is the right choice. But I'm not 100% sure. Would like to hear some opinions on this.
- dajohnson89 8y agoA line connecting the points would be very helpful.
- nostrademons 8y agoIt's more interesting as log-scale cumulative returns. The fact that Buffett dramatically outperformed the S&P 500 in...uh, I think it was 1976, but it's hard to read on the chart...is mildly interesting, but the really striking figure would be "Given $1000 invested in Berkshire Hathaway in 1966 vs. $1000 invested in the S&P 500, where would you be now?"
- pmart123 8y ago
- cm2012 8y agoIt's a pleasure to read this every year.
- johnwheeler 8y agoI calculate the intrinsic value of the first 4 “groves” to be in the neighborhood of 510 B. That comes from multiplying the after tax earnings by 12, which is a conservative multiplier, taking the market value of the equity portfolio and subtracting deferred taxes at the current tax rate, and valuing the cash (including the 20 B reserve) at face value. I don’t know how to value the float. Its value is largely dependent on the record of the person deploying it I’d think.
- prewett 8y agoYou've got a magic number there: 12. It can't be an "intrinsic" value unless you can justify why 12 is the appropriate multiplier. The value of the float is at least the value of it invested in Treasuries, I would think.
- tim333 8y agoAll investment analysis with future cash flows implicitly assumes a similar magic number - the PE ratio or discount rate or some equivalent. 12 is appropriate if you assume a discount rate of 8.3%.
- johnwheeler 8y agoYes, this is right. I chose 12 because that was a maximum bound Benjamin Graham used in his analysis IIRC. Though, stocks have gotten more expensive on a relative-basis in the last 40 years, so a more appropriate multiplier might be 13 or 14.
- johnwheeler 8y ago> The value of the float is at least the value of it invested in Treasuries, I would think. No because the float is actually a liability for paying claims. The company doesn't own the float, but they can use it like an interest free loan. And, in fact that might be a good way to value it. The cost of what would be interest payments at whatever the prevailing rates are.
- gwern 8y agoAs the annual letters go, this one seems remarkably uninteresting? No major purchases or restructurings, and the rest is canned summary & familiar from previous letters. 2018 was a quiet year at BH, seems, despite all.
- nabla9 8y agowhen the markets are overvalued, Berkshire just sits and waits. Consolidated cash flows. Years 2018, 2017, 2016 (millions of USD): Net cash flows from operating activities: 37,400 45,728 32,647 Net cash flows from investing activities: (32,849) (41,009) (84,225) Net cash flows from financing activities: (5,812) (1,398) 12,791
- tuxxy 8y agoAnyone else find it odd that BH is using a self-signed cert?
- Someone1234 8y agoThe certificate provided is just completely invalid, it isn't even for their domain, and as you said isn't signed by a CA. Seems to be a default for their host provider. So it might be more accurate to claim that they don't support HTTPS.
- tim333 8y agoI don't see any certs on my browser - just an http:// http:// site. Berkshire has always been a bit minimalist on tech and there isn't any private info or logins.
- downrightmike 8y agoBuffet is famously behind the times on web developments. The company is stuck in the 90's because the tech does the job and it is cheaper.
- davio 8y agoI went to the Berkshire Hathaway site back in the 2000s (still looked the same) and thought I had been hacked.
- nabla9 8y agoThe "American Tailwind" chapter is very good read with many gems. Like this: >Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 3 1 ⁄ 4 ounces of gold with your $114.75. And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle. And close to the end: > Charlie and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind. It is beyond arrogance for American businesses or individuals to boast that they have “done it alone.” The tidy rows of simple white crosses at Normandy should shame those who make such claims.
- wolfhumble 8y agoFor those who wonder what the seemingly random number '$114.75' comes from (from the Berkshire Hathaway 2018 Annual Shareholder Letter [pdf]): "On March 11th, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six. What I bought was three shares of Cities Service preferred stock. I had become a capitalist, and it felt good." Taking inflation into account, '$114.75' in 1942 is equivalent in purchasing power to '$1,444.20' in 2019, according to: http://www.in2013dollars.com/us/inflation/1942?amount=114.75 http://www.in2013dollars.com/us/inflation/1942?amount=114.75
- zeckalpha 8y agoFurther, not many US based business plans look this far forward. The end of the section suggest they are looking past the next 77 years: > There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders. > Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky – gloriously lucky – to have that force at our back.
- code4tee 8y agoI love how he just opens every letter with that table comparing Berkshire to the market since the 1960s.
- known 8y agoWarren Buffett's Berkshire Hathaway swung to a $25.4 billion loss in the fourth quarter due in part to an unexpected write-down at Kraft Heinz https://www.wsj.com/articles/warren-buffetts-kraft-heinz-bet-dragged-down-berkshire-hathaway-in-2018-11550929951 https://www.wsj.com/articles/warren-buffetts-kraft-heinz-bet...
- mruts 8y agoThe Law of Active Management states that IR = IV * sqrt(n) IV is your “edge” or conviction and n is the number of independent trades you make. So the lower your IV (closer to 50%) the more trades you need to put on. So there are two ways to make money being an active manager: have a low IV with a high N or have a high IV with a low N. It’s difficult to maximize both at the same time because you won’t be able to find enough trades with a high IV, so you need to keep lowering it (the lowest you can go is obvioisly >50%) to get more trades. This is why quant funds have so many positions, because they aren’t very certain about their bets. Buffet takes the opposite approach, only putting on a couple massive trades that he thinks have a high IV.
- beefman 8y agoBerkshire is a CEF that never makes distributions. Change my mind.
- sriram_sun 8y agoLooking at the numbers in the first page of the report, I'm asking myself if it makes more sense to move my index funds to BRK.B? Thoughts?
- zeckalpha 8y agoHistory is not indicative of future performance, though an index is more diverse and less risky than BRK.
- prewett 8y agoThose numbers are skewed by the fact that BRK dramatically outperformed the index for the first twenty years. More recent performance has not been so stellar--and Buffet repeatedly says that the returns will be less the larger BRK gets. You should read a bunch of the annual reports and decide if it makes sense to move any of your funds into BRK. If you decide it is a good idea, Buffet bought back stock when BRK.B was around $207 (you should probably research this to be sure), so anything under that is probably a good price. (Above it might be a good price, but we know that at or below was a good price in Buffet's eyes) as of 2018.